Why Did Most Australian Colonies Develop Protective Tariff Policies - Case Study Example

Protective Tariff Policies The difference between free trade and protectionism is clear cut. Free trade appreciates the right of an individual to engage in voluntary dealings in goods and services from within the boarders and from without. More importantly, free trade creates jobs by reducing prices. When consumers have more money left in their pocket, then there will be some additional spending, which in turn stimulates production and employment. Moreover, free trade shifts jobs from high relative cost sectors that cannot compete to low relative cost sectors that may be able to compete. If an individual willingly acquires an imported article, then they get a better-quality product and/or maybe at a better price. Free international trade, conveys benefits to all countries and individuals, even enterprises that partake by permitting, internationally, the specialization that transpires in a free economy (Foster 110).  To explain the reason as to why most Australian colonies decided to develop protection tariffs, this paper will try to analyze what these policies asserted and the effects that they carried. It will try to explain theories like Viner’s theories and if they really applied or not. The paper analyses the start and the outcome of the protection policies to answer the above question. Issues to be analyzed are such as employment and trade which were some of the major resultant of the protection policy. We shall be able to witness that as the Protection Tariffs became prevalent the level of industrialization in Australia grew. We shall also witness that as the tariffs grew, then they started creating a burden on the economy and needed to be checked. But how did the government react to this, and was it successful or not (Murphy 45) Victoria became blatantly protective. They placed high import duties which were placed on a wide range of goods in order to endorse the production of substitutes for importation. The introduction of a protective tariff reveals a change in government intentions away from building the country, supporting the expansion of production of wool, wheat farming and mining, just to lay more emphasis on economic development, while in essence it is developing manufacturing. Protective tariffs were first in Victoria and adopted as a way of encouraging budding manufacturing industries (Parkes 33). What protectionists do is that they fail to notice the advantages of specialization and relative advantage. Imposing a tariff redirects production from countries where the amount produced per unit is higher to countries in which the amount produced per unit is lower. Moreover, a trade policy that imposes restrictions reduces that person to person contact and the social accord. It increases provincialism, provokes retribution, and suppresses innovation by sinking competitive pressures. Most importantly, import restrictions, infringes an individual’s liberty to trade.  Economists from all disciplines appreciate the importance of free trade; the greater overall production. This greater production is due to the independence of each and every producer to dedicate oneself in that line where he or she has an innate advantage. The innate advantage of every trading associate acquires the domino effect from the differences among people and locations. For example, a chief reason why the American economy is as industrious as it is that there is a large geographic area of free trade. The American Constitution has very wisely forbids protectionist tariffs and quotas among certain states (Harborne 34). “A working man can gain nothing and would in the end suffer severely from protection. Protection is a policy used to cheapen the brain and muscle of a man and to increase the price of hi food and every article of clothing or comfort for his humble household. It is a policy to depreciate his wife’s hard earned sovereign that she takes to the market.” (Parkes: 1892) Protectionists in most Australian colonies laid their emphasis on employment and in the distribution of income. They went on to argue that with protection it is easier to maintain a large population with living standards that would rather have not been possible. On the same issue, they proposed protection to avoid or kill the chances of unfair competition and bring about the sense of self sufficiency. Protection made sense in such places like Australia where the real wages was usually rigid in the face of market demands for them to fall. For example, in Victoria, the first Protectionist Tariff was passed in 1866. The protectionist line laid its focus on small and upcoming industries and the effects they would bring with them on employment opportunities. Their point of argument was that infant industries needed to be nurtured and needed that protection until that time that they will be established. Their underlying principle was that for a country to become internationally competitive in a particular product, it has to first acquire the necessary skill to produce that thing. Production is the only criterion towards achieving this but such production cannot be competitive at these initial and toddler stages. In the end losses may be experienced and the private sector will not make investments. When the common tariff was introduced, questions arose concerning the level of output of Australia in general. J. Viner expressed his concern in the Customs Union Issue (New York 1953) saying that the main concern here was resource allocation; the effect of the tariff on the output through its influence specialization according to static comparative advantage. Viner had his angle of interpreting the matter. He asserted that if the change in resource allocation induced by a customs union was from a higher cost of production to a lower cost of production within the partner countries of the customs union, then that would be a trade creation (Cox 23). On the other hand if the change in resource allocation was from a lower cost of production to a higher cost of production then that would be termed as trade diversion, according to Viner. If on a balanced scale there was trade creation then this means that there has been an increase in the amount of resources. By 1901, Victoria held the most protective tariffs. These tariffs had to meet certain government requirements. First and foremost was that of revenue. The amount of revenue raised by had to meet the needs of the states after not more than one quarter had been deducted by the commonwealth (Conlon 78). It is clear that the protective effect of the tariff could be seen. In 1905 and 1906, the government’s intentions were very clear in that the new tariffs caused no significant weakening in the economic position of some of the most important Victorian industries. The effect of the tariffs was not only visible in the government’s intentions to maintain existing industries but also in the government’s anticipation in a significant fall of imports. Viner notes that within the colonies, the tariffs were raised significantly and the effect of this was unequivocally trade diversionary, meaning it was a total diversion from free trade. Viner’s view was that the conclusion that this was a diversion from free trade should be tailored in order to that trade between states would be a substitute not for overseas trade but for domestic production within a state (Younkins 54). Viner’s basic approaches have been qualified on several instances and in one of them, it is noted that changes in relative prices would have consumption effect which would reinforce trade creation effects and modify trade diversion effects. Consumption changes can therefore be thought of as an influence diminishing the trade diversion effects of the federation tariff. An influence on the terms of trade would also be eminent in that the amount of imports would be reduced and this was evident in Australia in 1901 where the number of import were insignificant. It would be thought that trade diversion affected by these qualifications were not in total sufficient to alter the general conclusions reached by this approach. Then what would be the effect of the conclusion if the static framework was to be discarded and then the dynamic and the structural aspects that were born of this union were to be considered. Aspects including change in technology, internal and external economies of scale and the effects of competition on the efficiency within which the given factors were to be applied (Friedman 360). Economists will say that result from these dynamic factors would be visible depending on the time scale considered. It is viewed that the success of the industrialization in Australia was measured by the output per person and was not very significant until fifty years later. Dynamic changes could not be felt ar be tangible at this time primarily because of the degree of integration already achieved before the federation. What can be put into consideration at this point are the economies of scale. The commonwealth Government was of the thought that the markets were large. These market were not worth exploiting initially due to their small size but are now and by all. Most explicitly, the big beneficially would be Victoria. Victoria would bear the advantage of a larger market, a larger output and consequently a cheaper output. During this period, a deeper look into the economies of scale in manufacturing found out that there was little change. This left Viner’s theory with only one conclusion to be made; that dynamic factors could not be included in the analysis because there could be no change in the static conclusions concerning the effects of the union. Another aspect qualified in Viner’s theory is the effect of tariffs on employment. According to Viner, there was full employment to the extent that there would be no idle resources to be allocated any form of employment. No emphasis in writing has been made on how tariffs have employment-creation effects. There is also a mention that tariffs, apart from inviting direct retaliatory action, they would reduce exports through foreign national income repercussions. None of these allegations have been substantiated. It’s for these reasons that there are contradictions in Viner’s theory that there would be reallocation of resources. Statistic carried out showed that the population of male wage earners was very high from the whole population, and a drought could not make it bad. This then led to the conclusion that there scope for the employment effects of the tariffs. At this point Viner’s theory that there would be reallocation of employed resources could not stand. While the principles of protection were highly appreciated in Australia and other colonies, issues arose from time to time and this reincarnated the Free trade versus Protection debate. In 1927, the government appointed a committee to look into details the effect of the Australian tariff. Though some said that the tariff had the advantage of maintaining a large population that could have been expected at the same standard of living without the tariff, the committee recommended to the government that the strategy of using the tariff may have reached its climax and the need for a change. They said that though the tariff has not been disastrous, as it continues growing, then the cost were starting to overtake the benefits which have natural limits while the costs have none. The burden of the tariffs had reached an economic limit. This means that the burden is life threatening to the standard of living (Richardson 132). In the mid 1950s there were persistent demands that the government keeps a check on the tariffs. The Tariff Board recommended a government sponsored tariff. The Tariff Board in its report put the following proposal to the Government:  “The Board proposes a progressive and systematic review of the Tariff consisting of an internal examination by the Board of the structure and levels of protection in the Tariff, together with public inquiries into the main areas of production where there has been no recent public inquiry and where the levels of protection are in the medium to high range.”  Due to these demands a committee was appointed in the early 1960s and it came up with a report that there is need for a policy re-examination. In the late 1960s the committee started looking into the effects of the tariff in terms of resource allocation. They went further to look into the traditional ways of tariff making which essentially revolved around reviewing of duties only in response to manufacturers who were seeking some more assistant. In the long run the tariffs were change and chronology into these changes tells us that the tariffs had to work hand in hand with free trade. The Australian tariffs were very protective and enthused. In a number of ways the economy and especially the Colonial economy, depended on the export of a constricted variety of staple primary products and commodities to export to the World’s industrial powerhouses as the engine of economic growth. REFERENCES 1. Cox, Jim. The Concise Guide To Economics By Jim Chap: 19 2. Friedman, Milton. Bright Promises, Dismal Performance, (New York: Harcourt, Brace And Jovanovich, 1983) pp. 357 - 372. 3. Younkins, Edward. Protectionism: A Threat To Individual Rights By Dr. Liberty Free Press November 15, 2000 4. Conlon Roy. 'Protection Of Australian Manufacturing: Past, Present And Future', In Satya Paul (Editor), Trade And Growth New Theory And The Australian experience, allen & unwin, sydney, 1998, p. 226. 5. Foster Collins: AUSTRALIAN ECONOMIC HISTORY, REVIEW VOLUME XVII, NO. 2 PGS 95 – 116 6. Tom Conley: The Vulnerable Country: Australia And The Global Economy University Of New South Wales Press Ltd 2009 Pg 94 – 127 7. Linda Richardson: Is knowledge enough? – Realizing The Benefits of Free Trade, Agenda Vol 6, No. 2, 1999, pgs 127 – 140 8. Parkes Hayes (1876), speeches on various occasions connected with the public affairs of N.S.W. 1848 – 1874, George Robertson, Melbourne 9. Murphy, Dennis. Labor in Politics: the state labor parties in australia 1880-1920, University of Queensland Press, St Lucia, Qld, 1975, pp. 26-29 10. Harborne, Tim, “Tariff History of Australia”, University of Sydney, M.Ec, 1927, p. 102n Read More